However, some in the City welcomed the size of the reduction, which boosted the pound, saying a bigger move could have accelerated the recent slide of sterling. On the stockmarket, shares slid almost 90 points to 4420.53, a drop of 1.9% as investors were unimpressed.

The Bank said in a statement: "The world economy appears to be under­going an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time."

It decided to lower rates again today for the fourth month in a row as there remained a "significant" risk of undershooting its 2% inflation target. The central bank expects UK output to fall sharply during the first part of this year, although it also noted that the "substantial" depreciation of sterling over recent months may help to moderate the impact on British exports of the global slump.

The cut was good news for homeowners. Nationwide said it would pass on the reduction in full, taking its base mortgage rate from 4% to 3.5% from 1 February. HSBC and Lloyds TSB will also pass on the cut in full.

If borrowing costs are cut further in coming months as expected, lenders may soon have to cope with zero interest rates. Once the Bank's base rate hits 1%, people with mortgages that track a point below base rate will find themselves paying no interest. Savers, on the other hand, will suffer as savings rates fall to virtually nothing.

"The size of today's move seems appropriate," said Philip Shaw, chief economist at Investec. "An easing was clearly justified given the appalling state of the economy, while there seemed little point in risking further currency instability with a sharper cut.

"Risks of deflation and the general woes of the economy clearly imply that the MPC will bring rates down as far as it can. We assume this is 0.5%‑0.75%, but it could be lower."

The pound rose about 2 cents against the dollar to $1.5247 after the rate decision, and firmed to a three-week high against the euro.

Brian Hilliard, economist at Société Générale, said: "I think it's pretty likely that it was sterling that decided them to slow down the pace of cuts. I still think there's more in the pipeline."

The British Chambers of Commerce was disappointed by the decision. David Kern, its chief economist, said: "The outlook is dire, and the MPC must act forcefully. In order to ensure that the economy does not slide into a prolonged depression, we urge the MPC to reduce interest rates to almost zero in the next few months. It must also supplement lower interest rates with vigorous quantitative easing."

Vince Cable, the Liberal Democrat Treasury spokesman, welcomed the cut but said the government "must now set out a clear strategy for kick-starting lending to consumers and sound businesses".

He added: "Unless the lending market can be quickly unfrozen, ministers will have to investigate whether one of the state-owned banks can be used to increase lending to businesses."

In its statement, the Bank of England highlighted the need for extra measures to kick-start lending. It noticed that the availability of credit to both households and businesses had tightened further, pointing to the "need for further measures to increase the flow of lending to the non-financial sector".

As interest rates approach zero, the authorities are edging closer to the point where radical action such as quantitative easing – pumping money into the economy in a bid to get people and businesses spending again – becomes the only option to prevent deflation.

Darlingtoday killed speculation that such policy measures were imminent. "Nobody is talking about printing money," he said.

Stuart Porteous, head of group economics at Royal Bank of Scotland, said: "Few people – and certainly not the MPC – question the challenges the UK faces in 2009. As rates head towards zero, policymakers will be forced to embark on ever more unorthodox measures to get the economy moving again. Listen carefully and you can almost hear the printing presses being cranked up."

Since the last MPC meeting in December, the UK downturn has continued to deepen. Unemployment has shot up, the slump has spread across the economy from manufacturing and construction to the once-booming services industries, while the high street has been shocked by a host of business failures, including well-known names such as Woolworths. The property market has ground to a halt, with house prices in freefall and new mortgage approvals hitting a fresh record low of just 27,000 last month.

The chancellor, Alistair Darling, admitted yesterday that the recession was deeper than the government had expected. And the Bank of England's governor, Mervyn King, has warned that Britain could enter a period of deflation later this year. Consumer price inflation has so far only fallen back to 4.1% from September's peak of 5.2%, but is expected to slow sharply in coming months in the wake of lower oil and food costs. Oil prices have dropped by more than two-thirds since hitting an all-time high of over $147 a barrel last July.

The MPC has been making big cuts in borrowing costs since October, when it joined forces with other major central banks in a co-ordinated half-point rate reduction from 5% to 4.5% as the financial system teetered on the brink of collapse. In November the Bank slashed rates by 1.5 percentage points – the biggest reduction it has ever made – followed by a one-point cut to 2% a month later, which took borrowing costs to the lowest since 1951.